Low vanilla prices cause slack profits for McCormick
sales were lower than expected, pushed down by struggling vanilla
prices, but remained confident for the rest of the year, writes
Philippa Nuttall.
Sales for the quarter rose a slight 5 percent to $604 million compared to the first quarter of 2004 and earnings per share were down on last year's at $0.26 compared to $0.27.
The company blamed the decline in earnings on a lower gross profit margin, higher interest rates and a higher tax rate. In addition, special charges in 2005 reduced earnings per share by $0.01.
Gross profit margin for the first quarter of 2005 was significantly impacted by vanilla. McCormick purchased vanilla beans in 2003 to ensure an ongoing supply and manage cost. However, a larger than expected crop has caused vanilla bean costs to drop rapidly and as projected, the company is therefore experiencing significant margin pressure, particularly in the industrial business.
Notwithstanding, the company was confident that the situation would improve in the coming months.
"We are gaining sales through new products, marketing programs and distribution expansion," Joyce Brooks, assistant treasurer at McCormick explained to FoodNavigatorUSA.com.
She said that they had experienced "some headwind with these growth initiatives in the first quarter due to lower vanilla pricing, inventory reductions by our retail customers and item reductions in our product line". But, she believed that these factors would have a lesser impact in coming quarters, adding that the company expects the problems with vanilla prices to be finished by the end of the third quarter.
However, Brooks suggested the vanilla situation could get worse before it gets better.
"Prices could decrease further, but by the third quarter we will be buying vanilla beans at the market price," she said, though declined to offer an estimation for the extent of the decrease.
"In our consumer business, we took a price reduction of 40 percent in January. We have not indicated that there will be an additional decrease, but it is possible," she explained.
Brooks said that value-added products - seasoning blends for grilling, blends with a grinder top bottle, liquid seasoning mixes offering a greater level of convenience - rather than simple ingredients are showing the greatest sales strength to end consumers. Meanwhile, on the industrial side, sales to restaurants of condiments, coatings and seasonings have been strong, as well as sales of snack product seasonings, according to the company.
The total category for spices and seasonings is growing at a rate of 1-2 percent annually.
"We expect to exceed this growth with new products, more effective marketing, expanded distribution and with acquisitions," said Brooks.
